Last Wednesday, the UAE announced gasoline and diesel price deregulation starting August 1, effectively phasing out fuel subsidies. The measures are credit positive for the UAE and Abu Dhabi, a Moody’s report said.

The measures are credit positive for the UAE and Abu Dhabi (Aa2 stable), the wealthiest of the seven emirates and which accounts for 94 per cent of the UAE’s oil production, because they will bolster government finances dented by the downturn in global oil prices, explained the report released by Moody’s Investor Service.

Fuel prices will be linked to global oil prices and adjusted on the 28th of each month.

Despite progress in diversification, hydrocarbon revenues comprised 75 per cent of the UAE’s consolidated revenues in 2014.

“Given our forecast for Brent crude oil prices to average $60 per barrel in 2015, versus $101 in 2014, we expect a 27 per cent drop in consolidated government revenue. In 2015, the UAE will likely face a fiscal deficit of 2.3 per cent of GDP, its first deficit since 2010, and a decline from a 10.3 per cent surplus in 2014. Phasing out fuel subsidies will partly offset the negative effect of lower oil prices,” said Moody’s.

Increases in gasoline prices will reduce the economic cost of subsidies the UAE public sector has provided to domestic consumers. According to the International Monetary Fund, post-tax petroleum subsidies in the UAE would have cost the government $7.0 billion in 2015 (1.9 per cent of GDP) under the current system, a decline from $10.2 billion in 2013 (2.5 per cent of GDP).

Per capita, UAE fuel subsidies equal $730 per resident per year, compared with $2,810 in Qatar (Aa2 stable) and $2,522 in Kuwait. The International Energy Agency estimated the energy subsidization rate (i.e., the subsidy as a percent of full cost) for the UAE at 65 per cent for 2013, compared with 78 per cent in Qatar and 77 per cent in Kuwait.

Fiscal gains from subsidy reform are likely to be moderate this year and accelerate when oil prices increase, as Moody’s expects they will next year. Total subsidies and transfers made up around 22 per cent of all consolidated expenditures in 2014.

“Although details of the pricing formula have not yet been disclosed, we estimate that removing fuel subsidies will reduce the UAE’s consolidated fiscal deficit by 0.4 per cent of GDP this year and contribute another 0.6 per cent of GDP to the fiscal balance in 2016, which we expect will return to a small surplus,” said Moody’s.

“Fiscal savings from the subsidy reform will increase if, as we expect, oil prices rise to $75 by 2018. Linking retail prices to global prices also makes public finances more predictable because the public sector will no longer absorb increases in global oil prices.”
 
The inflationary effect will likely be moderate: fuel consumption is less than 4 per cent of the UAE’s consumer basket and gasoline prices are already higher in the UAE than in the rest of the Gulf ($0.47 per litre in the UAE versus $0.16 in Saudi Arabia.

According to the Ministry of Energy, deregulation will lower diesel prices, which were kept high to cover some of the cost of gasoline subsidies. – TradeArabia News Service